Court ruling on demand response breeds uncertainty

Source: Rod Kuckro, E&E reporter • Posted: Wednesday, May 28, 2014

Officials at PJM Interconnection are reviewing a Friday federal appeals court ruling that invalidated a 2011 Federal Energy Regulatory Commission order providing incentives for electricity users to consume less power, a practice known as demand response.

FERC has no jurisdiction over demand response, the court said (Greenwire, May 23).

The court ruling strikes a blow to the Obama administration’s energy efficiency efforts and injects a large degree of uncertainty into how the rapidly expanding demand-response industry will play a role in the nation’s electricity markets.

The divided ruling by the U.S. Court of Appeals for the District of Columbia Circuit effectively said FERC overstepped its authority under the Federal Power Act in its Order 745, ruling that demand response is a function of retail electricity markets, which are governed by the states.

The goal of Order 745, which was cheered by environmental groups, was to establish parity between demand-response providers — which pool reduced energy usage by condominiums, hospitals and universities — and retail electricity providers (Greenwire, March 16, 2011).

Grid operators and power providers, represented by the Electric Power Supply Association, the American Public Power Association and others, challenged the FERC order, saying the commission was unlawfully wading into retail electricity markets when the Federal Power Act granted the agency jurisdiction solely over wholesale markets. Retail sales, they argued, are regulated by states.

“PJM is still reviewing the order and its ramifications with respect to PJM’s energy, ancillary service and capacity markets,” the company said in a statement.

“At this point, it’s business as usual for us,” Andrew Ott, PJM’s executive vice president for markets, said during a conference call Friday. “We can’t predict what the future will hold. FERC will have to make some clarifications as to what it means for our tariff. We’re still studying it,” he added.

In its statement, PJM noted that the ruling is not in effect until parties have had time to ask for a rehearing by the court. PJM plans to “provide further information regarding this matter at the Markets and Reliability Committee meeting on May 29,” it said.

In the D.C. Circuit’s 2-1 ruling, Judge Janice Rogers Brown wrote that FERC’s contention that retail markets affect wholesale rates and that, therefore, the commission has jurisdiction is unavailing.

Under that premise, she wrote, FERC’s authority would be “almost limitless.”

“The commission’s rationale, however, has no limiting principle,” wrote Brown, a Republican appointee. “Without boundaries, [FERC’s interpretation] could ostensibly authorize FERC to regulate any number of areas, including the steel, fuel, and labor markets.”

She added in her opinion, “The commission’s authority must be cabined by something sturdier than creative characterizations.”

Senior Judge Harry Edwards dissented. He noted that several conditions have to be met before demand-response providers are paid under the order. Those factors, he contended, largely fall on the retail, not the wholesale, market.

“Focusing on the market in which the consumption would have occurred in the first instance,” wrote Edwards, a Democratic appointee, “one can conceive of [the order] as impermissibly falling on the retail side of the jurisdictional line.”

Edwards also said there was enough ambiguity in the statute on the demand-response issue that FERC deserved deference from the court.

Julien Dumoulin-Smith, an analyst at investment bank UBS, in a Friday note said the ruling “could have significant impacts on power markets.”

“We see states taking over [demand response] regulations as cutting both ways. We see the potential for more generous compensation in jurisdictions encouraging participation, while those that have been opposed, implementing tighter rules,” Dumoulin-Smith wrote.

Environmental groups that fought to maintain FERC’s policies said the decision was ominous and would likely limit the agency’s ability to act in the future.

“Our higher-level concern is that the grid is evolving pretty quickly with new resources, smart grid technology, on-site power, and we’re concerned this decision could really tie FERC’s hands in adapting to a new grid,” said John Moore, a senior attorney for the Natural Resources Defense Council’s Sustainable FERC Project. “It’s a pretty strong decision that doesn’t give FERC any room to improve the rule.”

Demand-response programs will now be directly tied to a patchwork of state programs that are “uneven,” making it more difficult for businesses like Wal-Mart Stores Inc. and other industrial companies — new and established — to sell their demand-response services into the grid, Moore added.

The decision could also hurt the integration of renewables because demand response helps in supporting the incorporation of wind and solar onto the grid, he said.

“If demand response is going to mean anything in wholesale markets, it’s going to require states to better integrate their retail programs,” Moore said, while adding that most states do not currently operate vibrant retail demand-response markets.